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March 26, 2015

Militiamen loyal to the government of Yemeni President Abd Rabboh Mansour Hadi sit on top of tanks in the southern city of Aden. (STR/AFP/Getty Images)

Summary

While the al-Houthi movement struggles to manage multiple regional challenges to its north, its rise to power in Yemen is a setback for Saudi Arabia on its southern flank. After the fall of the Yemeni government, Riyadh will have to capitalize on the al-Houthis' need for political and financial support to re-establish its influence in the country. But because Iran is trying to fill that support gap, too, Yemen has become another battleground where the two sectarian rivals will struggle against one another.

Analysis

After being driven from the capital of Sanaa in September, Yemen's government is at war with itself. President Abd Rabboh Mansour Hadi issued a statement March 19 denouncing the airstrikes on his compound in the southern port city of Aden as an attempted military coup by forces loyal to his predecessor and one-time ally, former President Ali Abdullah Saleh. Earlier that day, soldiers and militiamen loyal to Hadi battled their way into Aden's airport and stormed a nearby military base, both of which were under the control of Gen. Abdel-Hafez al-Saqqaf, a Saleh loyalist.

The infighting in Aden comes after Ansar Allah, the pro-Iranian Zaidi group led by Abdul-Malik al-Houthi, emerged as the single largest force in the country after taking over large swathes of territory in north and central Yemen. The al-Houthis represent a change in the balance of power in Yemen and even the Arabian Peninsula that has opened the door for Iran to become a major player in what was the exclusive domain of Saudi Arabia not too long ago.

The Rise of the al-Houthis

A number of factors facilitated the al-Houthis' power grab in Yemen. First, Saudi Arabia's attempts to manage the Yemeni government in the wake of Arab Spring protests did not go as planned. Saleh stepped down in favor of his one-time vice president, Hadi, but the move exacerbated intra-government fissures along tribal, ideological, political and military lines. By the time Hadi took over, Riyadh's method of playing the various Yemeni factions against each other had undermined the old system to the point where the al-Houthis could take advantage of and align enough tribes to push beyond its northern stronghold of Saada and make their way down into areas south of the capital.

While Saudi Arabia has long meddled in Yemen and focused on combatting al Qaeda in the Arabian Peninsula, Riyadh lost sight of developments in Yemen while focusing on other regional fights. Saudi Arabia has been trying to stem chaos in the region in the aftermath of the Arab Spring, especially threats from transnational jihadist groups such as the Islamic State. It has also been occupied with supporting Bahrain's pro-Saudi Sunni monarchy as it faces a democratic uprising from its Shiite majority. It was not that Saudi Arabia was not paying attention to Yemen, but it was not expecting Iran to gain ground on its southern frontier via a movement that is not a traditional Shiite one and in fact is theologically closer to Sunni Islam.

Also, Saudi Arabia did not do enough to prevent Saleh from returning to Sanaa, where he could plot against those he felt were responsible for his fall from power and execute his own return. His plotting weakened the Yemeni government and diminished its ability to combat the al-Houthi insurgency.

Finally, it appears the al-Houthis have learned lessons from when they clashed with Saudi border guards in 2009. Now the al-Houthis are taking caution to steer clear of any direct engagement with the Saudis along the border and have instead focused inward. They are consolidating the nascent power they have accumulated and are weakening groups that might resist them.

The strategy appears to have worked. The Saudis have focused on the conflicts to their north and have not reacted aggressively to the power shift that has taken place in Yemen. Now it is too late to reverse course — at least in the short term. Riyadh lacks the military capabilities to directly intervene in the country and impose order like it did in Bahrain. Also, the different political factions they used to operate through by proxy do not have the same power they once did, making any efforts less effective.

Even if it had the means to intervene, it is not entirely clear the Saudis would want to. The al-Houthis do not pose a major threat to Saudi Arabia; on the contrary, the rebels' control over north and central Yemen insulates Saudi Arabia from the chaos in other parts of the country and especially from al Qaeda in the Arabian Peninsula, which is a more immediate threat. The Saudis would rather have the al-Houthis on their southern border instead of a jihadist quasi-state that is hostile to them. While the Saudis would prefer not to have al-Houthi control of such a large piece of Yemen so close to their border, the situation seems to be the best outcome in a situation where all options are bad — as long as the al-Houthis do not start pushing northward.

Potential Border Incursions

Even if the al-Houthis decided to change course, Saudi Arabia would be able to defend itself. It already has a fence — though it is nothing more than a concrete-filled pipeline — with surveillance equipment in place along long stretches of the border. Nonetheless, Zaidi militiamen were able to penetrate the border in 2009, but they did not make it past the mountains. The Saudi military was able to contain them there and used airstrikes to eliminate them.

The eastern part of the border in Hadramawt is open desert with little cover to conceal an incursion force. Surveillance aircraft can spot ground vehicles from long distances, and reaching a Saudi city or even a road would require traversing hundreds of miles of desert.

The west appears to be the only place where an incursion could have success because there are mountains, roads and people there. The area also happens to be adjacent to the al-Houthi stronghold of Saada. However, the Saudi military has enough capacity to deploy forces that outnumber al-Houthi fighters. Fighting could possibly last for a while, but in the end, the al-Houthis would not be able to withstand or break through the Saudis, who have artillery and air support.

Financial Aid Is Key

The biggest factor keeping the al-Houthis from antagonizing Saudi Arabia is their need for financial support. The country's poor financial and economic situation means the al-Houthis — or any other governing group for that matter — cannot maintain order in country without external assistance. Without long-term financial support, Yemen's water shortages could turn into a humanitarian crisis that draws in Saudi Arabia, creating the need for Sanaa and Riyadh to cooperate. The al-Houthis are aware of this, explaining why they have reached out to Riyadh to participate in indirect talks.

While it would seem logical for the al-Houthis to seek more aid from Iran, they know that Tehran is not capable of matching Saudi aid, even if the West were to lift economic sanctions. Iran can provide military, intelligence, logistical, and political support, but it has little hard cash to offer. Besides, Iran is more than 1,950 kilometers (1,200 miles) from Yemen, while Saudi Arabia is just on its northern border. Saudi Arabia can also help the al-Houthis gain international recognition as the legitimate government of Yemen.

Implementing the Hezbollah Model

The al-Houthis find themselves in a situation fairly similar to that of Hezbollah in Lebanon. Both groups are the biggest force in their respective countries, but they exist within political and demographic conditions that keep them from running their countries alone. Ansar Allah is trying to emulate Hezbollah in terms of getting other factions to work with it and to form a government like the confessional democracy in Lebanon.

Ansar Allah, however, is where Hezbollah was in the 1980s, and it will need time to translate its military prowess into political power. Also, the Saudis will try to prevent the group from going the route of Hezbollah. Unlike Lebanon in the 1980s, Yemen is not under Israeli occupation, and it does not have a neighbor like Syria that the Iranians can use as a conduit to nurture the al-Houthis.

Negotiating Yemen's Future With Iran

Saudi Arabia knows the threat is not pressing and has decided to abstain from any formal diplomatic talks with Yemen. Riyadh also knows Tehran wants to use the al-Houthis to gain a seat at the negotiating table and become a stakeholder in Yemen, so it is being cautious. Ultimately, serious geographic and political limitations prevent Tehran from undermining Riyadh in Yemen.

Though the Saudis see the situation as ultimately favorable, they cannot become too comfortable and allow the al-Houthis to take hold in Sanaa. Riyadh must ensure that the opposition improves its position enough to sufficiently counter the al-Houthi movement. At the same time, Riyadh will need to engage Ansar Allah in talks at some point, especially while the opposition is weak from infighting — and jihadists reap benefits from the struggle.

Many of Ansar Allah's opponents — including tribes, religious Sunni elements and members of the ousted government's security establishment — are open to cooperating with jihadist forces to fight the al-Houthis. The Salafists and jihadists are the most eager to engage in a sectarian battle because they see it as a way to enhance their position. Saudi Arabia cannot allow al Qaeda or the Islamic State to emerge as the most effective forces against Ansar Allah.

In fact, the United States has already indicated that it will work with the al-Houthis to fight jihadists in Yemen, another sign of the shift in the United States' position in the Middle East. Washington sees Iran, Hezbollah and even the Syrian government — except for President Bashar al Assad — as partners in the fight against the Islamic State, a development Saudi Arabia feels threatened by.

If the al-Houthis successfully consolidate their power in Yemen, the southern Saudi provinces of Jizan and Najran will become vulnerable to al-Houthi expansion in the long run because of the significant Shiite Ismaili populations that live there. Certainly the Iranians would welcome this outcome, influencing their support for the Zaidis.

The Saudis see the al-Houthis as a possible threat from Iran. How the Saudis engage with the group and try to put distance between them and Iran will be a key factor to watch. Nonetheless, Yemen's deteriorating security situation has created another Saudi-Iranian geopolitical struggle that will last for the foreseeable future.

That was the predominant sentiment I heard a little more than five years ago when I told U.S.-based venture capitalists about my plans to move my family out to Singapore to oversee Innosight's nascent investment and incubation arm. Since I had never done venture investing before, I was trying to get advice from as many people as I could. The conversations all went pretty much the same.

"Why Singapore? You'll never find any interesting deals there."

Sure, I would respond. At the time Singapore didn't have a sizzling start-up scene. But the conditions seemed to be ripe for one to develop. Like Silicon Valley, Singapore has strong research institutions and limited enforcement of noncompete clauses, a condition that academics now suggest can be a major driver of innovation. Like Israel, Singapore is small, with limited natural resources, which means economic growth requires innovative macroeconomic approaches. Both Singapore and Israel have liberal immigration policies for skilled workers. Both also have mandatory military conscription for males (Israel also has mandatory conscription for females), and as Dan Senor and Saul Singer argue in Start-up Nation, the Israeli military has been a breeding ground of innovation.

"Yes, but Israelis and Americans are innovative by nature. Singaporeans are not," critics would respond. "Name a Singapore start-up. I can't think of a single one"

A fair point. If you had asked Singaporeans in 2010 to identify a successful local start-up, they might have paused for a few minutes before mentioning Creative Labs. That company was a pioneer in the audio component market, having entered the MP3 market before Apple. But it was founded in 1981 and hit its revenue peak about a decade ago before delisting from NASDAQ in 2007 and shrinking substantially.

With the cautionary notes in mind, I arrived in Singapore in March 2010. It was indeed challenging in those early days to find good investment propositions. We made a couple, but they were proverbial needles in a haystack of business plans and pitches we sat through that were amateur at best, and outright naïve at worst.

Fast forward to 2015, and you see an island transformed. There are dozens, if not hundreds, of interesting start-ups, many clustered in "Block 71," a building close to INSEAD, the National University of Singapore, and government-sponsored innovation hubs carrying Star Trek–like names of Fusionoplis and Biopolis. The Economist dubbed Block 71, "the world's most tightly packed entrepreneurial ecosystem."

In my first year in Singapore we might hear news about a company landing venture funding every few months, and an exit (cashing out either through an IPO or by selling itself to a larger company) every year. Today, there's an investment seemingly every week; venture-capital investment in the tech sector increased from less than $30 million in 2011 to more than $1 billion in 2013. And we counted 10 local exits in 2014. Some of those so-called liquidity events are small by global standards, like the $30 million that customer service chat provider Zopim fetched. But others have been larger, such as the $200 million price Japanese e-commerce company Rakuten put on Viki, a video-streaming provider.

The Singapore surge seems particularly surprising given the city-state's staid reputation and stagnant start-up scene just a few years ago. As governments around the world try to spur entrepreneurialism to drive job creation and economic vibrancy, it's worth stepping back to consider the three components that in my view have combined together to power the Singapore story.

A hospitable environment. Singapore is regularly ranked as one of the easiest countries in the world in which to do business. There are rules, for sure, but they are clearly laid out and easy to follow. New companies can be set up in hours, if not minutes. Intellectual property is respected, and the rule of law is transparent. Immigration is no less a hot topic in Singapore than other countries, but Singapore makes it easy to get highly educated workers into the country, and has a specific employment pass targeting would-be entrepreneurs. The clean, efficient city has some livability advantages over Shanghai, Manila, Jakarta, or Bangkok.

Mindful of its international reputation among the creative class it's trying to attract, the government has worked hard to address the old view that there isn't much to do in "Singa-bore" with two casinos, a Universal Studios, Asia's largest aquarium, a "botanic garden masquerading as a theme park" called Gardens by the Bay, a 55,000 seat multipurpose stadium, internationally acclaimed restaurants, and an efficient, modern airport that makes leaving the country a breeze.

Serious government skin in the game. Entrepreneurs have long been able to tap into a range of grants and related programs to help with early development activities. In 2008, under the National Framework for Innovation and Enterprise (NFIE), the government launched the Early Stage Venture Investment Fund program. The initiative, which drew inspiration from a joint program between Israel and the United States called the Binational Industrial Research and Development Foundation, allowed five venture capital companies to receive matching funds from the government. One year later, we partnered with the government to prototype a new program under the NFIE. Ultimately dubbed the Technology Incubation Scheme (in Singapore, a scheme is a good thing), the program helped bring a flood of diverse investors into the country by offering to put up 85% of the capital in a start-up when investors put in 15%.

This level of support was critical for us. We had long been interested in venture investing. But as first-time investors without a deep track record in a country thousands of miles away from our U.S. headquarters, it was unlikely we (or any similar outside investor group) would have been able to develop the financial backing required to build a robust portfolio without government support. It is not a free lunch, however. We and other investors in the ESVF and TIS programs have had to make real commitments, as the government doesn't cover the salary of the team (and since it typically takes years for investments in start-ups to bear fruit that's important) or other overhead, and of course the investors have to pony up the capital to activate the government matching programs. It is hard to create an ecosystem overnight, but consistent, concerted efforts by the government have given a serious boost to start-ups in Singapore.

Wide use of soft power to address hidden barriers to entrepreneurialism. There is a misbegotten notion that entrepreneurs take risks because they don't have much to lose. In fact, research shows that the number one factor predicting whether someone will become an entrepreneur is whether the person has received an inheritance or a gift. Singapore's phenomenal development over the past 50 years means many of its citizens are sufficiently well off to take the entrepreneurial plunge without truly risking everything.

But doing something as uncertain as starting a business when you could go to work for a big bank or, even better, the government, was countercultural for the best and brightest a decade ago. So over the past few years political leaders have relentlessly talked up the importance of entrepreneurialism (see, for example, this Facebook post from Prime Minister Lee Hsien Loong); state-sponsored universities have aggressively pushed innovation (the National University of Singapore has a program to send students overseas to get firsthand experience in other entrepreneurial hubs); and the state-owned television company MediaCorp (full disclosure, I sit on its board) has run television programs celebrating entrepreneurialism.

Anafore, a company that we invested in two years ago, shows how times have changed. The company's software-as-a-service offering, called ReferralCandy, helps small businesses organize customer referral campaigns. The company's co-founders, Dinesh Raju and Zach Cheng, are both Singaporean whose academic track record scored them prestigious government scholarships to study at a top overseas university, Carnegie Mellon. In a previous generation, both would have likely followed a lucrative career in the government or perhaps even stayed overseas. Today, their company lives in Block 71 and is growing substantially.

These three ingredients create a reinforcing cycle, as entrepreneurs who enjoy success find they want to do it again. For example, in 2010 Melvin Yuan co-founded YFind Technologies, a company with a clever technology that could precisely pinpoint people's location inside a building by tracking their cellphones' interactions with WiFi access points. That capability could be the backbone of very valuable business intelligence services such as retail "heat mapping," showing sophisticated analysis of in-store traffic. We invested in the company in 2012 through our fund, with the government contributing 85%, and U.S.-based WiFi service provider Ruckus Wireless snatched it up in 2013. Yuan did well in the transaction, and was bitten by the entrepreneurial bug. He's gone on to found another start-up that's developing a disruptive way to match people seeking original art with the vast trove of untapped artistic talent all over the world.

Some successful Singaporean entrepreneurs are beginning to invest in the next generation of start-ups. For example, Hian Goh, who in 2005 cofounded the Asian Food Channel, in 2011 invested in Chope, a regional restaurant booking portal that our investment arm backed. And after Scripps Networks Interactive acquired the Asian Food Channel in 2013, Goh launched his own venture capital firm to invest in regional start-ups.

Global investors are increasingly taking notice. Dave McClure's 500 Startups recently invested in a local real estate portal. Established global venture firms like Sequoia and DFJ are stepping up local activities (in mid-February the "D" in DFJ — Tim Draper — said he views Singapore as a great environment for start-ups). In 2014 the government announced a new batch of participants in the ESVF program, including old names like Walden International (which was part of the 2008 batch) and new ones like Monk's Hill Ventures. Many of these investors view Singapore as a launching pad to regional emerging markets like Indonesia, the Philippines, and Vietnam. More broadly, of the 156 software companies founded since 2003 that are now worth more than $1 billion, close to a third are based in Asia.

There is beginning to be a critical mass of companies creating a self-sustaining innovation hub in Singapore. No local start-up has broken through as a major international player, but I'm quite convinced that will happen in the next five years. Maybe it will be RedMart, which could expand from its base of on-line grocery delivery in Singapore to address the complex challenge of food retailing in markets like Indonesia. Maybe it will be Anchanto (one of our companies), which is working on a "logistics as a service" platform that allows any small business to master the intricacies of e-commerce. Or perhaps it will be Clearbridge Biomedics, which has a disruptive way detect cancer via a "liquid biopsy"; Garena, whose popular gaming platform has attracted more than 100 million members (and driven its valuation above the magical $1 billion mark); Reebonz, whose on-line luxury portal is booming across Southeast Asia; or one of dozens of other interesting local start-ups.

No place is perfect. While there is substantial seed capital to get a business started (arguably too much), plenty of investors primed to write huge checks to drive expansion, and significantly more entrepreneurs in Singapore than there were only a few years ago, building a team to start a new company remains challenging. And the so-called "Valley of Death" where a company has to move from a promising smart to real viability remains very real.

But if the next five years feature anything close to the development of the past five, I expect a lot fewer questions about why Singapore makes sense for entrepreneurs.

Scott Anthony (@ScottDAnthony) is the managing partner of the innovation and growth consulting firm Innosight. He is the author of The Little Black Book of Innovation and the HBR Single, Building a Growth Factory. His new book is The First Mile: A Launch Manual for Getting Great Ideas into the Market.

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